Groupon: The golden nugget

There's nothing new in bulk buying and negotiating discounts. But Groupon does it in 47 countries for more than 70 million people. It's an idea so simple anyone could have thought of it. Unfortunately, Andrew Mason got there first… And now he's sitting on a company worth $30bn

Groupon founder Andrew Mason at the company's offices in Chicago. Photograph: Peter Hoffman for the Guardian
/Peter Hoffman for the Guardian

Four years ago, a large-limbed 26-year-old from Pittsburgh named Andrew Mason launched a website called The Point. The point of The Point, immodestly, was "to solve the world's unsolvable problems", harnessing the collective potential of the internet to lobby for social justice. As with the British site Pledgebank, campaigners could wield far greater power by pledging to give money or take action – but only if a certain number of others did the same. (Sometimes, they set other conditions: users once promised to donate "a ton of money" to fight Aids in Africa, provided that Bono retire permanently from public life.) There wasn't a business model to speak of, but Mason didn't really care: at heart, he was a left-leaning musician who played piano in a rock band and had, as he recalls, "an allergic reaction to the idea of making money". It was only under pressure from The Point's main investor that he started looking for ways to make it pay for itself. Why not, Mason wondered, adapt the collective-pledging idea to, say, pizza? A pizzeria, in a quiet period, could offer 60% off a quattro formaggi – much bigger than the usual discount – but only if a sufficient number of customers bought the deal in advance, thus eliminating all risk for the restaurant. The Point, as the middleman, could take a percentage. The pizza place in their office building proved willing to give it a try.

"And it was probably some time around then," Mason says today, running a hand through his disorganised hair and looking as if he still doesn't fully understand what happened next, which is fair enough, because nobody else does either, "that we had this realisation. It was, like… holy shit."

It was around the same time that Mason's allergy to making money seems to have vanished overnight. Which was fortunate, in hindsight, because recently he has been making quite a bit of it.

It is moving day when I arrive at the Chicago head office of Groupon, the company that emerged from that initial pizza-discount idea. But then again, as more than one staff member points out, it often is: when you're adding more than 150 employees every month in the US alone, no office space stays big enough for long. What started in one corner of one floor of one converted department-store warehouse now occupies four floors – today's move involves colonising a fifth – as well as another building down the street, another across town, and offices of various sizes in 47 countries across the world, from Britain to China to the United Arab Emirates. Just two and a half years since it was launched, Groupon has more than 70 million subscribers; its revenue for 2010 exceeded $700m. Late last year, it astonished the world of technology financing by rejecting a takeover bid from Google worth an eyewatering $6bn. And just over a week ago, it confirmed plans to go public, aiming to raise a sum that would make the company worth around $30bn, higher than the value of Google when it first did the same. It is, at least according to the calculations of Forbes magazine, the fastest-growing company in the history of capitalism. These days, it's not uncommon to hear normally sober commentators talk about Mason as if he had discovered some hitherto secret loophole in the fundamental laws of business. "Starbucks and eBay were standing still compared to what is happening with Groupon," Howard Schultz, the chief executive of Starbucks, has been quoted as saying. "I candidly haven't witnessed anything quite like this. They have cracked the code."

Even if you're a regular user of Groupon, or rival "daily deal" sites such as LivingSocial, this kind of talk may strike you as a little absurd. Sure, Groupon is fun: each morning, you open your email to discover one or two offers of steep discounts on restaurant food, or beauty treatments, or adventurous experiences: recent London deals, for example, included 54% off a kite-surfing course, tapas for two at £19 instead of £48, and six sessions of laser hair removal at a quarter of the regular price. Nominally, there's a catch – you get the deal only if it "tips", meaning that a sufficient number of people sign up – but today that almost always happens. And perhaps you even go kite-surfing and enjoy it. But none of that quite seems to explain the way small businesses fight to be featured on the site, so fiercely that in the US barely one in eight of them makes it in. Sometimes, the hysteria has turned unpleasant: some businesses claim Groupon was a disaster for them, swamping them with eager customers they weren't equipped to cope with. (According to the Urban Dictionary website, "Groupon anxiety" refers to the "feeling of anxiousness and not being able to sleep knowing that a new Groupon will be released after 1am".)

And yet compared with many of the web's major success stories, the idea behind Groupon – and the army of competitors that has sprung up in its wake, including, most recently, Google Offers in the US – seems almost offensively simple. Be honest: you couldn't have come up with Google's PageRank algorithm, which catapulted it to first place among search engines, and you couldn't have written the computer code that enables video-sharing on YouTube, or friending and poking on Facebook. But if you've ever organised a wedding, or even just a party in the back room of a pub, you've probably already negotiated a group discount. Groupon just does the same via email. Its ceaseless physical expansion, in terms of employees and office space, testifies to the fact that it is, from one angle, a very traditional business. Twitter gets by with a few hundred people to oversee its network; Groupon needs sales personnel to strike deals with merchants, advertising writers – it employs 400 writers and editors in Chicago alone – to compose advertising copy, and legions of customer service reps; it currently has a global workforce of almost 8,000 people.

"It confuses me, honestly, that this idea took so long to be thought of," says Mason, who since he doesn't have an office of his own is perching on a chair in a conference room, drinking coffee from a paper cup. He is wearing jeans and a wrinkled grey polo shirt that looks as though he may have pulled it from his dirty laundry in desperation.

"In music, which was my world before, you've got thousands and thousands of years of great ideas that have already been thought of. But the internet is basically 20 years old. So you can be way stupider and still have world-changing ideas. So yes, it is simple." He laughs. "It's ridiculously, enormously simple. It's still a gold rush. Any hick can show up and find a nugget."

Groupon's headquarters, as one might expect of any ascendant internet firm, is a buzzing hive of casually dressed, caffeine-dependent, earbud-wearing twentysomethings, many seated not on office chairs but on the bright blue exercise balls that are provided to every employee.

The walls are plastered with handmade posters and Photoshopped images perpetuating elaborate inside-jokes. There is still a detectible sense of the entire operation as an ironic satire on the idea of running a multinational company, as if nobody can quite take the idea seriously.

The firm's customer service department consists largely of actors and standup comedians from Chicago's flourishing improv scene: "I walk past sometimes and hear them singing to customers," says Julie Mossler, Groupon's communications manager. They have reason to be happy: Groupon in the US has an "open vacation policy", meaning that employees can take as much holiday as they wish provided their work targets are met.

A terrifying amount of effort appears to have gone into creating something called Michael's Room, a windowless office converted into a teenager's bedroom, complete with wallpaper, rumpled, cigarette-burned bed, half-finished boxes of breakfast cereal and, bafflingly, an exercise bike that powers a record player that plays a 45rpm vinyl single of Smooth Operator by Sade; according to a complex Groupon legend, it belongs to a relative of the building's former owner. Mason once told the New York Times his true passion was "building miniature dolls' houses". What keeps all these antics just this side of cringe-inducing is that the collective sense of disbelief at the company's rise to global dominance seems sincere. Groupon is a ruthless, profit-focused enterprise, to be sure. But at least its progenitors have the good grace to find the whole thing rather ridiculous. (It's generally agreed that they overstepped the line with a series of darkly ironic ads that ran during this year's Superbowl, posing as awareness-raising campaigns before revealing themselves as ads: "The people of Tibet are in trouble, their very culture is in jeopardy. But they still whip up an amazing fish curry, and since 200 of us bought at Groupon.com, we're each getting $30 worth of Tibetan food for just $15 at Himalayan Restaurant in Chicago.")

All this humour, though, can deflect attention from the Machiavellian manipulation that lies at Groupon's core. Not unusually for money-off deals, there's a built-in time limit; some offers expire within 24 hours, others in a few days. But the voucher, once purchased, is usually valid for several months, so buyers aren't put off by the notion of having to disrupt their schedules in the near future; you need only think of yourself as the kind of adventurous person who really ought to try kite-surfing sometime soon. The risk that an insufficient number of people might opt for the deal unwittingly turns you into an unpaid salesperson, spreading the word among family and friends. Paying upfront acts as a mechanism of "strategic pre-commitment", making it likelier that you'll overcome your natural tendency towards inertia and make a concrete plan; then again, perhaps you're kidding yourself, and you'll never get around to redeeming the coupon. Groupon makes plenty of money either way: its cut is commonly 50% of the coupon's value, and in the UK, at least, they keep 100% if it's never redeemed.

From the perspective that Mason and his colleagues like to emphasise, Groupon is far more than a supplier of money-off deals. It is a "discovery engine" – a mechanism for forcing us out of our comfort zones and finding fulfilment. "When we decided to transition from saving the world to hawking coupons, we thought to ourselves, OK, how can we do this in a way that's not going to make us want to kill ourselves?" Mason says. "So the idea was to create something that was just as much a city guide, or a way to put the spotlight on interesting or unusual experiences that people wouldn't normally have. The discount would be a way to reduce the risk of stepping outside your comfort zone and trying something new. I wasn't interested so much in luxury goods – in getting people to buy their 80th purse, or something like that – because it's just more shit people don't need. I think we're tricking people into doing stuff that's going to make their lives better."

His concept of himself is as someone with a "bigger, deeper purpose", and it is an unusual one for a web entrepreneur: getting people to spend less time online. "We're reversing this trend of spending more and more time in front of the computer, helping people remember that there's some really cool stuff offline as well."

This isn't pure marketing bluster (although it's worth pointing out that an apparently increasing proportion of Groupon's deals in the UK are for fairly mundane services and products, not thrilling adventures). A number of psychological studies testify to the beneficial effects of comfort-zone-busting novel experiences; for one thing, they slow down the perceived passage of time, perhaps because they demand a greater degree of information processing, thereby ameliorating the alarming sense of the years racing by faster and faster as one ages. Couples who pursue novel experiences together report happier relationships than those who focus on familiar rituals.

Mason remembers: "We started getting these ridiculous emails, like, 'My husband and I had grown estranged, but because of Groupon we go out more and spend more time together and we're reconnecting'."

But there is, of course, an entirely different way of understanding services such as Groupon, which is that they are engaged in persuading you to part with money for things you never thought you wanted – or, more precisely, actually didn't want before receiving a "deal of the day" email. You were feeling fine, but now you're worried you're insufficiently adventurous for having never tried rock-climbing. The thought of hair colouring or nail treatments at 75% off having entered your mind, you're a little more self-conscious about your hair or your nails. Or how about 56% off professional carpet cleaning, another recent Groupon deal in the UK? You'd never given it a moment's thought. But now that you look at that carpet…

There is a certain depressing inevitability to learning that the first coupon in history was created, in 1888, by the Coca-Cola company. It offered the bearer "one glass of free Coca-Cola at the fountain of any dispenser of genuine Coca-Cola", and it worked: by 1913, 8.5m free drinks had been claimed, and the company was on its way to soft-drink dominance. In America, far more than in Europe, coupons became a craze: thick booklets fall from many newspapers, or are stacked near the entrances of supermarkets; thousands more can be printed from the web. A subculture of "super-couponers" meet in online forums to share strategies for combining coupons in complex ways so as to reduce the weekly grocery bill to a few dollars, or even to reach the coveted goal of "overage", where the supermarket has to pay you. The US cable TV network TLC broadcasts a reality show called Extreme Couponing, though John Morgan, the executive director of the US Association of Coupon Professionals, apparently wishes it didn't.

"These whackjobs who spend 20 hours a week stacking coupons? That stuff drives us batty," he told Wired magazine last year. "They dance all over the rules."

Traditional coupons work by exploiting what economists call "price discrimination". If you are, say, a baker making chocolate cakes that cost £1 each to produce, selling them at £1.80 guarantees a healthy profit. But it also means sacrificing all those "price-sensitive" customers who won't pay £1.80 but would pay £1.30, still a profitable sale. A 50p-off coupon allows the cake-seller the best of both worlds: big profits from most people, and smaller profits from those who are willing to put in the effort required to locate, cut out and remember to use the coupon.

What's going on with Groupon is significantly more mysterious and complex – to the extent, indeed, that neither economic commentators nor the businesses that participate can agree on whether taking part makes sense for the merchant. By promising thousands of new customers, paying in advance, Groupon can negotiate much deeper discounts, and keeps half the cash anyway, so the coupon itself is likely to result in a much smaller profit, or even a loss. Groupon is less about price discrimination, then, than it is a previously unexplored branch of advertising: merchants hope to win new regular customers, and to benefit from word-of-mouth. (Some kinds of businesses, such as restaurants, can also set the price of the coupon, so it's hard not to spend a lot more when you show up.) Off the record, moreover, businesses that have done deals through Groupon suggest that the savings can be borderline fictional: a £50 deal for, say, a group fitness course that's usually "worth £150" isn't quite the same as saying it usually sells for £150, a claim that is strictly regulated in the UK. Indeed, the specific course may not have existed until it was created for the purposes of offering a deal through Groupon.

"It's coupons on steroids," says Donald Marron, a former White House economics adviser and professor who writes a respected blog on microeconomics. "You hear these horror stories of the little companies that get overwhelmed" – one bakery owner in Oregon, in a blogpost that went viral, described the effect of a badly structured Groupon deal on her business as "sickening". But Mason compares such tales to "how the media covers only plane crashes, not safe landings… A lot of those stories are just a natural part of exploring, well, what is this new model of marketing? What is this thing? Everybody's trying to figure that out."

One of the company's earliest successes was with discount deals for sensory-deprivation flotation tanks – apparently, in the hyperstimulated world of daily deals, what people crave is no stimuli at all – but Tim Strudwick, owner of the London flotation centre Floatworks, says he's unlikely to want to do a deal with Groupon again. "Honestly, it really wasn't a great experience," he recalls. "The clients they tend to attract tend to be bargain-hunters, people you definitely won't be able to convert into regular customers. If you've paid so little money for an experience, somehow I don't think you attach so much value to it. If you pay £40 [for an hour in a tank], then mentally you're determined to get more value out of it than if you paid £14. It's like how it's different if you buy a designer T-shirt or one from Primark. You'll look after it differently, and you'll feel different when you're wearing it." According to a study this year by Utpal Dholakia, an academic at Rice University in Texas, more than 40% of merchants who negotiated deals with Groupon would not choose to repeat the experience, though Mason insists the company's internal research shows that more than 95% would.

Restaurateurs have made similar complaints to Strudwick's: that the culture of group-purchased coupons appeals most to "dealseekers", people who have little intention of becoming loyal customers but who would rather eat wherever they can pay the least, ordering little and failing to tip. Perhaps as a result, the anecdotal evidence is that more and more Groupon deals for restaurant food involve a specific set menu that's cheap to provide – the "one pasta dish and a glass of house wine" type of offer. This is the least appealing version of the future conjured by the success of Groupon and its rivals: a planet of obsessive dealseekers, addictively chasing the next bargain, never prepared to pay full price, driving smaller merchants out of business and prompting larger ones to offer ever lower quality products for our ever lower payments, in a frenzied, dispiriting race to the bottom.

"One thing I've come to learn about myself," Mason says, "is that I have to keep going. I look at being a capitalist businessperson like riding a bike – if I go too slowly, I'll fall over. Or it's kind of like a shark: if I stop swimming, I'll just die." Hence the logical next step, a smartphone application called Groupon Now!, which recently launched in several US cities. It's welcome screen displays just two buttons that between them diagnose the modern human condition: "I'm Hungry" and "I'm Bored". Unlike daily-deal emails, Groupon Now! takes advantage of your phone's geolocation capabilities to work in real time: clicking "I'm Hungry" will notify you of restaurants offering group discounts within a short walk of wherever you are. ("I'm Bored" does the same, except with experiences to help pass the time.) In Mason's dreams, you wouldn't think about Groupon only when its emails arrived; instead, it would permeate your entire experience of local shopping, turning your phone into a forum where merchants compete, minute-by-minute, to seduce you. "Think about it," Mason says. "If I could get a deal on whatever my impulse was, whenever my impulse struck, and it was nearby, I would use that all the time. It would reshape the way that I shop."

The standard take on all this is that Groupon is merely facilitating a more perfect exchange of information, leaving everyone happier: a restaurant could run a Groupon Now! deal during quiet afternoon stretches; the customer looking for a 3pm lunch could oblige with his or her business, and save plenty of money. All this is true. And yet Groupon Now!, by throwing the group-deal process into vivid relief, points to another interpretation. If the social, mobile internet is a gold rush, the gold isn't really cheaper pizzas or cut-price hair removal or kite-surfing classes. It is your attention, which Groupon sells to whichever merchant is willing to name the best price. There's nothing inherently wrong with this. It's how advertising has always worked. But advertising is something we usually just tolerate; rarely has participating in the process of being advertised to been designed to be so engrossing or addictive. While it may be true that you're getting a brilliant deal, it's equally true to say that you're the product.